EUROPEAN COMMISSION PUBLISHES DRAFT REVISED VERTICAL BLOCK EXEMPTION REGULATION AND VERTICAL GUIDELINES

Lieven Peeters

Partner, ALTIUS

European Commission publishes draft revised Vertical Block Exemption Regulation and Vertical Guidelines

On 9 July 2021, the European Commission (“Commission”) published a draft version of its revised Vertical Block Exemption Regulation and the related Vertical Guidelines. The Commission’s current Vertical Block Exemption Regulation No 330/2010 of 20 April 2010 (“VBER”) and the Commission’s Guidelines on Vertical Restraints ( “VG”) will expire on 31 May 2022, and the draft revised rules promise to bring some important changes in the assessment of vertical agreements after that date.

The basic system remains unchanged

The basics of the VBER and VG will remain the same: a vertical agreement between a supplier and a buyer is presumed to fall within the scope of the exemption of  Article 101(3) of the Treaty on the Functioning of the European Union (“TFEU”) and therefore is not prohibited by competition law provided the agreement meets certain conditions set out in the VBER. A vertical agreement will fall within the VBER’s “safe harbour” if the buyer and supplier each have a market share not exceeding 30% on their respective relevant markets, and if the agreement does not constitute a hardcore or excluded restriction as stated in the VBER and as further explained in the VG. The draft revised VBER and VG reveal the Commission’s plans on how to amend and update the rules on hardcore and excluded restrictions in the context of more and more complex distribution relationships in a rapidly changing digitalized world. A clause that falls outside the VBER’s safe harbour is not presumed to be anticompetitive, but a burdensome and uncertain assessment will be required to determine whether the clause would qualify for an individual exemption under Article 101(3) TFEU.

Most important changes

The most important proposed changes are the following:

  • Dual distribution

Dual distribution is the situation in which the supplier also sells directly (often through its own website) to the customer and thus competes with its distributor at the retail level. The draft revised VBER does not apply to the agreements concluded by an online intermediation services provider that is also active itself at the retail level, thus that provider will have to perform the assessment for an individual exemption under Article 101(3) TFEU. Regarding dual distribution situations not involving online intermediation services, the parties’ market shares are key. Only if the supplier’s and buyer’s combined market share on the retail market does not exceed 10%, the draft revised VBER’s safe harbour then will apply in full. If that low combined threshold of 10% is exceeded, and only as long as the buyer’s and supplier’s individual market shares do not exceed 30% on their respective relevant markets, then the draft revised VBER’s safe harbour would apply except for any exchange of information between the parties. This leaves the ‘door open’ for much uncertainty, as no guidance is provided at the moment on the information exchange that would still be allowed in the context of dual distribution.

  • Online sales restrictions

As a general rule, a supplier cannot impose on its buyer a restriction that, directly or indirectly, in isolation or in combination with other factors, has as its object preventing the buyer or its customers from effectively using the internet for the purposes of selling its goods or services online. Such a restriction would be a hardcore infringement. A restriction preventing the use of a specific online advertising channel by the buyer or its customers such as price comparison tools or advertising on search engines is set out in the draft revised VG as an example of such a hardcore infringement. A prohibition for the buyer not to use the supplier’s trademarks or brand names on its website would be equally problematic. By contrast, the draft revised VG allow the supplier to give certain instructions to its distributors on how the products are to be sold. Vertical agreements including a restriction on the use of a specific online sales channel, such as online marketplaces, or setting quality standards for selling online, can benefit from the block exemption, irrespective of the distribution system used by the supplier.

  • Dual pricing

Unlike under the current rules, the draft revised VBER’s safe harbour would be available for dual pricing agreements. In the case of dual pricing, one buyer pays a different price for products intended to be resold online than for products intended to be resold offline. However, the safe harbour would only be available if that wholesale price difference takes into account the different investments and costs incurred by the hybrid distributor so as to incentivise that hybrid distributor for the appropriate level of investments made online and offline.

  • Active sales restrictions

The current rule remains that a supplier can prohibit active sales by his distributor into an exclusive territory or customer group allocated to another distributor, but that passive sales into such an exclusive territory or customer group cannot be prohibited. The draft revised VG contain (new) examples of what would be considered an active or passive sale. For instance, offering on a website or online shop language options that are different to the ones commonly used in the territory in which the distributor is established (except for English) amounts to a form of active selling. Similarly, setting up one’s own website or online shop with a domain name corresponding to a territory other than the one in which the distributor is established is a form of active selling into that territory.

When setting up a system of exclusive distribution, the supplier under the draft revised VBER would no longer be required to appoint only one distributor per exclusive territory or customer group. Instead, shared exclusivity would become possible, allowing a supplier to appoint multiple exclusive distributors in one and the same exclusive territory or customer group and protect those exclusive distributors against active sales from outside that territory. The number of exclusive distributors appointed for one and the same exclusive territory or customer group should however be limited, in proportion to the allocated territory or customer group in such a way as to secure a certain volume of business that preserves their investment efforts.

The draft revised VBER offers greater protection to the authorised distributors in a selective distribution system. The supplier would be allowed to prohibit its exclusive distributors and its other (non-exclusive and non-selective) distributors from actively and passively selling to unauthorised distributors located in a territory where the supplier operates a selective distribution system.

The draft revised VBER further provides that the restriction on making active sales to customers in an exclusive territory or customer group can also be imposed on the buyer’s customers that have entered into a distribution agreement with the supplier or with a party that was given distribution rights by the supplier.

  • Parity clauses

So-called wide parity or most favoured nation (“MFN”) clauses by online intermediation service providers are listed as excluded restrictions under the draft revised VBER and are thus problematic. Under such a wide parity clause, the buyer of online intermediation services agrees not to offer its goods or services under more favourable conditions using competing online intermediation services. Narrow parity clauses – in which the buyer of online intermediation services agrees not to offer its goods or services under more favourable conditions using its own sales channels – would be covered by the draft revised VBER’s safe harbour.

  • Resale Price Maintenance

The current rule remains unchanged that a supplier cannot impose on its buyer minimum resale prices or fix resale prices. The imposition of a maximum retail price or the communication of a resale price recommendation as such does not amount to a prohibited resale price maintenance practice, as long as no incentives are given to apply a certain price level (for example the reimbursement of promotional costs) or disincentives to lower the sales price. The draft revised VG seem to indicate that also so-called minimum advertised price policies (“MAP”) – prohibiting a buyer from advertising prices below a certain level set by the supplier –  would be allowed if the buyer remains free to charge a different – also lower – price.

Furthermore, the fixing of the resale price in a vertical agreement between a supplier and a buyer that merely executes a prior agreement between the supplier and a specific end user – a so-called fulfilment contract – would not constitute resale price maintenance where the end user has waived its right to choose the undertaking that should execute the supply agreement.

  • Non-compete clauses

As under the current rules, the draft revised VBER provides that non-compete clauses for longer than five years are considered as excluded restrictions and therefore problematic. The draft revised VG now indicate that a non-compete clause that is tacitly renewable beyond a period of five years is however covered by the VBER’s safe harbour provided that the buyer can effectively renegotiate or terminate the vertical agreement with a reasonable notice period and at a reasonable cost, thus allowing the buyer to effectively switch its supplier after the expiry of the five-year period.

Future

The draft revised VBER and VG bring some welcome clarifications and relaxations on certain points. However, even though the Commission can and presumably will still make some amendments to the current drafts, it can be expected that the final versions of the revised VBER and VG will leave some pending questions unanswered and on other points will even introduce or increase uncertainty as to which types of clauses should be considered problematic or not. The heightened activity of the European and national competition authorities in the field of vertical agreements however makes clear that all parties in a vertical relationship should be very careful when negotiating their respective rights and obligations and exchanging information. Indeed, one thing that remains unchanged, irrespective of whatever the final VBER and VG will look like, are the high fines – up to 10% of a party’s worldwide group turnover – that can be imposed for competition law infringements, including vertical infringements. Undertakings should therefore carefully review their distribution agreements before the entry into force of this new legal regime.

Comments on the draft texts can be submitted until 17 September 2021. The final revised VBER and VG will enter into force on 1 June 2022 and will apply until 31 May 2034.